Strong economy and labor markets buoy consumer sentiment
While I have been and continue to be cautious on consumer-related sectors over the long term, for this holiday season the stars are aligning in a very positive way. A stronger labor market, some wage growth and higher wealth are translating into higher confidence. The University of Michigan Consumer Sentiment Index is now at 93.8, up from 80 in March and at the highest level since January 2007. Back in late October we upgraded our view of consumer discretionary companies from underweight to neutral. At least for the 2014 holiday season, the U.S. consumer is likely to recoup a bit of their old swagger.
Market Realist – Consumer sentiment is high. The robust economic growth and labor market recovery have put US consumers in a festive mood. The US economy (SPY) grew by 5% in the third quarter as per revised estimates (which you can see in the previous graphs). This is the strongest showing in almost 11 years. The growth comes even as a slowdown happens in many parts of the world, including China (FXI), Japan (EWJ), Russia (RSX), and the Eurozone (EZU).
Market Realist – Consumer sentiment is at its highest in eight years, spurred by a strong jobs market report and an economic recovery. The University of Michigan Consumer sentiment index has surged to 93.8, as you can see in the previous graph.
According to estimates from Customer Growth Partners, shoppers spent 2.4% more than last year during the weekend before Christmas. Super Saturday sales increased to $42 billion from $41 billion in 2013. The holiday season retail sales could be well on track to show growth of 3%. The Consumer Electronics Association has estimated that consumer spending on electronics would balloon to record highs of $33.76 billion, a rise of 2.5% from last year. Retailers like Best Buy (BBY) are expected to benefit from sales of electronic goods like Apple’s iPhone 6 (AAPL), smartphones, and tablets. Consumer preferences for handbags could help increase earnings for Kate Spade (KATE) and Michael Kors (KORS).
Market Realist – Consumer spending is likely to stay buoyant in 2015. According to the University of Michigan, consumers expect a wage gain of 1.8% in 2015. Decreasing household debt is helping elevate consumer sentiment as well. The graph above shows the level of household debt in the US economy.
As gasoline and oil (USO)(BNO) prices remain low and the economy continues to speed up, consumer sentiment is likely to become more optimistic. 2015 could prove to be a good year for the US consumer, as consumer discretionary spending (XLY) is likely to see an upswing.
Read our series 4 reasons why businesses could begin spending again soon to see how businesses should step up spending as consumer sentiment keeps rising.